AMMB move should boost earnings
AMMB HOLDINGS BHD By Alliance Research Buy Target price: RM7.40 AMMB announced that it had received the Finance Ministry’s approval, through Bank Negara, for the acquisition of a 100% equity interest in Kurnia Insurans.
Kurnia Asia Bhd (KAB) told Bursa Malaysia that its application to Bank Negara for the possible disposal of its equity interest in Kurnia Insurans to AMG Insurance Bhd (AMG), which is a 51% subsidiary of AMMB, had been approved.
Both companies said details on this proposal would be released subject to the signing of a definitive agreement between amgand Kurnia Asia.
Even though the details on this potential acquisition remain scanty at this point, we view the announcement positively since it illustrates management’s undivided commitment to grow its non-interestincome stream.
We understand that the contribution of non-interest income to total income is expected to increase to more than 40% over the next three to five years, compared with around 30% at present.
Based on the financial year ending Dec 31, 2012 (FY12) consensus earnings estimate for KAB of Rm73.7mil, this acquisition will yield about 4.5% to AMMB’S financial year ending March 31, 2013 (FY13) earnings, before accounting for funding cost.
Pricing issues remain the main determinant whether this potential acquisition is earnings and value accretive to the shareholders, in our opinion. We observe that the pricing of recent mergers and acquisitions in the insurance industry ranged from 1.4 times to 3.4 times price to book value.
This may imply that the range of purchase consideration for 100% stake in Kurnia Insurans could range between rm 963.9mil and rm2.34bil, based on its 2010 book value of Rm688.5mil.
Nonetheless, we wish to highlight that the recent acquisition price range may not serve as a good pricing benchmark for Kurnia Insurans, being a dominant player in the domestic general insurance market.
On the other hand, the ongoing external uncertainties could cap KAB’S bargaining power to dispose of its subsidiary at a higher price.
Based on the market consensus, KAB is currently trading at an expected price to earnings ratio of 15.5 times and price-to-book value two times.
The group is expected to yield a return on equity of 14.8% in 2011. Again, we wish to emphasise that current valuation metrics of the parent company may not serve as a good gauge for the potential disposal of its wholly-owned unlisted subsidiary. TA ANN HOLDINGS BHD By Maybank Investment Bank Research Buy Target price: RM8 TRADITIONALLY a major timber player in Malaysia, Ta Ann has in recent years diversified and fortified its business model. Today, it has stronger earnings quality emanating from three core businesses, with its palm oil division being its key earnings driver.
A dwindling quota of natural logs in Malaysia and competition from softwood has resulted in earnings cyclicality and stagnation of earnings prospects for Ta Ann in the past. Today, after years of aggressive expansion (since 2000) into oil palm plantations in Sarawak, its oil palm division dominates earnings, contributing 82% and 77% of its 2010 and 2011 pre-tax profit.
Ta Ann was one of the earliest among listed Malaysian loggers to venture into the palm oil industry, a vision that will continue to reward shareholders for the foreseeable years. Palm oil provides a steady and growing income source, and has diversified Ta Ann’s earnings base from pure timber since 2006.
The Sarawak planter started its maiden plantation in 2000 and accelerated its planting programme after 2004. Ta Ann has planted on average 3,300ha per year since 2004, compared with an average new planting area of 1,000ha between 2000 and 2003.
As of Dec 31, 2011, Ta Ann had 30,911ha of oil palm planted area in Sarawak. This planted acreage puts Ta Ann on par with the likes of TSH Resources, TH Plant and IJM Plantations.
Ta Ann has a relatively higher proportion of immature estates at 39% in 2010 (Dec 31, 2011 = 33%) compared with its peers. Its oldest estate is merely 12 years old, and only 14% have reached peak production age (over nine years of age).
Hence, with its young weighted age profile of five years, it will continue to enjoy exponential growth at least for the next four years (even if new planting stops now), providing visibility in fresh fruit bunches (FFB) output and earnings growth.
We forecast Ta Ann’s FFB production to grow at double-digit rates yearly till 2017. This assumes 3,000ha of yearly new planting between 2012 and 2015, consistent with the recent historical average.
Even without new planting from 2012 onwards, Ta Ann will still enjoy double-digit FFB growth till 2014. TECHNOLOGY SECTOR By OSK Investment Research Overweight WE expect personal computers (PC) shipments to shrink for the first two quarters of 2012 on the back of seasonality but growth should return in the second half, with a high chance of hitting the 4.4% annual growth target set by leading IT (information technology) research and advisory company Gartner this year.
However, we think PC makers would replenish their hard disk drives (HDD) inventories in the first quarter due to over-consumption in the fourth quarter of 2011 and given the supply bottlenecks.
As for the global HDD market, (research firm) isuppli indicated that for 2012, first-quarter shipments would pick up, increasing by 13% quarter-on-quarter, followed by sequential growth of 14%, 11% and 4% in the second, third and fourth quarters respectively.
On the other hand, the market research firm expects the average selling prices (ASP) of HDDS to dip sequentially by 3% and 9% in the first and second quarters respectively, but remain above the 2011 ASP for the rest of the year.
Worldwide semiconductor sales continued to contract month-onmonth, in line with seasonal patterns but the semi conductor industry Association (SIA) believes that semiconductor sales will improve moving forward.
Optimistically, the book-to-bill ratio was above the equilibrium level in February on the back of increased bookings and billings for semiconductor equipment manufacturers by 12.2% and 6.4% respectively.
We expect growth to be muted as demand softens in the first half, followed by a stronger performance in the second half. Similarly, Gartner anticipates a better revised worldwide semiconductor revenue growth of 4% annually, higher than the earlier forecast of 2.2%
We continue to like local HDD component manufacturers, given the increasing demand for their products, signing of supply contract agreements and slower decline in ASPS. That said, we expect the local semiconductor packaging and testing companies to perform better in the second half of 2012.
Also, in line with the bullish market sentiment, we reduce the discount ascribed to our valuation multiples. AUTOMOTIVE SECTOR By RHB Research Institute Neutral (maintained) THE motor industry made a shaky start to 2012 with total industry volume (TIV) in January declining 14.7% month-on-month and 25.2% year-on-year.
The softer sales were attributed to seasonal factors given the earlier than usual Lunar New Year holidays, the more stringent financing guidelines implemented by Bank Negara and the lingering effects of component supply disruption arising from the floods in Thailand.
While the lower-end segment is likely to be the most exposed to the tighter financing environment, we expect the market (borrowers and lenders) to gradually adapt.
The key event in the second quarter of 2012 will be the announcement of the third iteration of the National Automotive Policy (NAP).
The NAP is expected to address the shortcomings of the present policies to improve the competitiveness of Malaysia as a regional automotive production hub and provide incentives to attract new foreign investments into the industry. Domestic car parts manufacturers could be the immediate beneficiary of a betterthan-expected new automotive policy.
This could include the repeal of manufacturing licences for sub-1.8litre vehicles, extension of tax exemptions for hybrid vehicles beyond 2013, tax incentives to encourage the local production of hybrid vehicle components and measures to encourage local research and development and promote exports of automotive components.
Malaysia’s efforts to develop a niche in hybrid vehicles continue to be hamstrung by its fuel subsidy policies. Cheap subsidised fuel makes a less compelling argument for consumers to pay a premium for hybrid vehicles despite the duty exemptions.
We believe market expectations for the new policy to encapsulate the required innovative solutions and hard choices for the benefit of the industry are relatively low. Domestic car parts manufacturers could be the immediate beneficiary of a betterthan-expected new automotive policy.
Both Thailand and Indonesia enjoy a strong start this year as regional production hubs for numerous global original equipment manufacturers in addition to having a highly developed supporting eco-system, extensive car parts supply chain and large domestic markets.
Volkswagen AG’S decision to establish a completely-knocked down partnership with Drb-hicom in Pekan has been an isolated success.
Risks to our call on the sector include a more severe-than-expected economic slowdown, unfavourable forex trends and financing limitations affecting industry sales volumes.
Foreign exchange worries at the beginning of the year have receded with the strengthening of the ringgit against the US dollar and yen.